The Rising Cost of Healthcare in Retirement


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Everyone knows the old saying about death and taxes. But there’s one more certainty everyone who retires will need to face: the staggering cost of healthcare. Many people don’t appreciate the significant impact healthcare costs can have on their retirement savings. Yet these expenses can overwhelm even the best-laid retirement plans.

It’s a fact that healthcare costs have increased at a record pace during the last several years, and many believe they will continue to rise. In earlier generations, retirees often received healthcare packages as part of their pension plans. But these benefits are far less common today, and most retirees are now forced to cover all costs not paid by Medicare.

How much will be enough?

In 2012, the Employee Benefits Research Institute calculated that a 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50% chance of having enough money to cover healthcare expenses (excluding long-term care) in retirement, $227,000 to have a 75% chance of covering those expenses, and $283,000 to have a 90% chance of doing so. These estimates are 1 to 2% lower than the savings targets estimated in 2011.1

Not only are these figures much higher than most people have saved or planned to save for healthcare in retirement, they don’t include the costs of a potential nursing home stay or prolonged serious illness, which could increase the costs considerably.

Several factors contribute to making it difficult to plan adequately for healthcare expenses in retirement:

  • Healthcare costs go up fast. So fast that even if you do plan for them, you could end up falling short of what you’ll need. According to the Congressional Budget Office, healthcare costs have risen 4.9% on average from 1965-2005, adjusted for inflation.2 At that rate, healthcare costs will double approximately every 15 years. Which means most people will see healthcare costs double at least once during their retirement — maybe even twice.
  • Some healthcare costs are hidden. For example, many people don’t know that dental, hearing and vision care are not covered by Medicare.
  • We’re living longer now. It’s now normal for retirees to live well into their 90s, which increases the chance of prolonged, and very expensive, nursing home stays — which average about $7,000 a month nationally.3 The Congressional Budget Office estimates that about 33% of individuals who turned 65 in 2010 will need at least three months of nursing home care, 24% will need more than a year, and 9% will need more than five years.4

    One ray of hope here: Long-term care insurance can help cover a portion of nursing home costs after the policy’s waiting period has been satisfied and policy conditions are met. While long-term care insurance premiums can be expensive, the coverage may be able to help protect your savings.
  • Medical advances are expensive. One of the reasons we live longer today is the rapid pace of medical breakthroughs, often resulting in highly effective — and expensive — drugs and other life-prolonging treatments. Some new cancer treatments can cost upwards of $150,000 a year. Even after insurance and Medicare cover 80%, you could still end up with a bill of $30,000. Not everyone will need these advanced treatments, but understanding what they can cost in retirement can help provide some insight for your planning.

What will happen to Medicare? While some choose to ignore it, the future of Medicare is another factor with serious implications for healthcare costs. According to the government’s own figures, the trust fund supporting Medicare Part A, which covers hospital benefits, will be exhausted by 2022.5 There is no way to guess exactly how Medicare benefits will change given an impending insolvency, but it is safe to assume that there will be either cuts in benefits or increases in premiums and taxes to cover shortfalls in the system’s funding, all of which would result in increased costs to the beneficiary.

What can you do today? The good news is there are ways to plan for and help defray retirement healthcare costs.

Now that you know what you’re up against, consider these steps as you build your healthcare savings plan for retirement:

1. Figure out how much you need to save. Start by breaking down annual costs for prescriptions, insurance premiums, dental, hearing and vision coverage, and any other costs associated with healthcare. Then project those costs to various age ranges (i.e., 10 years from retirement to age 75, 20 years from retirement to age 85, etc.) to give yourself a baseline picture of what healthcare will cost you as you grow older.

  • Consider your family’s longevity in your planning.
  • Account for inflation, and remember that healthcare costs have risen at a rate much higher than the standard inflation rate.
  • If you are considering retiring prior to age 65 when Medicare coverage kicks in, make sure you take into account that healthcare will be considerably more expensive during the pre-65 years.

2. Carefully consider your post-retirement health plan options. Most Americans will end up purchasing a Medigap plan to cover the costs in excess of Medicare coverage. Keep in mind that these plans come in many different shapes and sizes, with varying benefits. Do your homework and read the fine print on several different plans before making a decision. The right decision early in retirement could save you tens of thousands of dollars during retirement. Download Medicare and You for more information about these important benefits and costs.

3. Plan for long-term care. Long-term care includes services to help a person carry out essential daily activities like eating, bathing and dressing. Employee health insurance doesn’t cover long-term care and, generally, Medicare doesn’t either. Medicaid can cover long-term care expenses, but only after most other resources you have are exhausted. Many factors, including your current health and family health history, need to be considered. So be sure to talk with an advisor to fully understand the options for covering a nursing home stay or other long-term care needs.

If you or a loved are currently dealing with, or foresee facing, declining health and related costs, review the materials and support from your state or local healthcare information agency to learn more about available programs and services. Further, consult with a qualified elder care planning professional and/or elder care attorney to help avoid costly mistakes and help ensure future healthcare and financial needs are met.

4. Consider postretirement savings plans. A Health Savings Account (HSA) allows you to save money in a tax-deferred account to use for healthcare costs, similar to a 401(k) or 403(b)plan. If you are already maximizing your contributions to a tax-deferred retirement plan, making contributions to an HSA prior to retirement or enrollment in Medicare can provide some additional tax benefit and allow you to grow that money tax free into retirement, helping offset some of the growing costs of medical care.

Some companies also offer a Retiree Health Savings Plan. This is a savings program that helps you pay for health-related expenses during retirement on a tax-advantaged basis — so you can preserve your retirement savings for other needs. There are generally no limits on your after-tax contributions, you don’t pay taxes on the earnings your contributions make, and your employer can also make contributions to the plan. Payments can be made on a tax-free basis for qualified medical expenses incurred by plan participants, spouses and eligible dependents. Employer plan terms, contribution limits and eligibility requirements may vary.

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